SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to SLC Agrícola's Third Quarter 2019 Earnings Conference Call.

Today, we have with us Mr. Aurelio Pavinato, CEO; and Mr. Ivo Marcon Brum, CFO and Investor Relations Officer.

We would like to inform you that this event is being recorded. [Operator Instructions] Also, today's live webcasts both audio and slideshow may be accessed through SLC Agrícola's site at www.slcagricola.com.br, in the investor relations sections, by clicking on the banner Webcast 3Q '19. The following presentation is also available to download on the webcast portal.

The following information is available in thousands of Brazilian reais and in IFRS, except when otherwise indicated.

Before proceeding, let me mention that forward-looking statements are based on beliefs and assumptions of SLC Agrícola's management and on the information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstance that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Aurelio Pavinato, CEO. You may proceed.

[Aurelio Pavinato, executive]

Good morning. Thank you for participating in SLC Agrícola's earnings conference call for the third quarter of fiscal year 2019.

Let's start with Slide 3, please. In line with our current strategy to monetize the real estate gains, this month, we concluded the sale of 5,205 hectares, of which is 4,162 were arable, for BRL 83.2 million in cash or BRL 20,000 per arable hectare. The property is part of the Parnaíba farm in Maranhão state. According to our calculations, the transaction generates an internal rate of return in U.S. dollars of 14.1%. The company continues to operate on the area sold, with leasing payments at market prices.

On Slide 4, you can see the updated value of our land portfolio, which already reflects the results of the 2019 property appraisal conducted by Deloitte. The appraisal determines a total value of BRL 3.86 billion, which represents appreciation of 3.4% on 2018 for a net gain of BRL 183.5 million.

Let's turn to Slide 6, where we will comment on the prices scenario for our main products. Cotton prices have improved over the past few weeks, which we attribute to recent developments in the U.S.-China trade war, which has strengthened demand for fiber, and through the recent revisions to forecasts for the U.S. cotton crop, which is in the harvest phase.

Let's go now to Slide 7. For grains, international prices have improved in the recent months basically due to the continuation of shortfalls in U.S. output. The supply-demand balance for soybean and corn is poised to adjust in the '19/'20 crop year.

Let's go now to Slide 9, where we will comment on our operating performance in the '18/'19 crop year. With the harvest of all crops already concluded, the final soybean yield was 3,725 kilograms per hectare, a new record and 5.7% above the initial projection and 0.8% higher than the last crop year. The result also is 16% above the national average for '18/'19 crop year based on data from Conab. In the case of cotton, due to the rains in April and May we mentioned in last quarter, after concluding harvest, we adjust the estimated yields, and with 75% of processing already concluded, the current projection for the cotton lint yield, considering the average of the first and second crop, is 1,656 kilograms per hectare, down 2.4% from the initial budget.

For corn, the yield was 7,021 kilograms per hectare, 22.8% higher than the last crop year, 3% higher than the initial budget and 27.4% above the national average according to Conab figures for the second crop.

I will now pass the call over to my colleague Ivo Brum, our CFO and IRO, who will comment on our financial results in the period.

[Ivo Brum, executive]

Good morning, everyone.

Let's go to Slide 11, which shows some highlights from our income statement for the period.

Given the characteristic of our business and also the current accounting methodologies, the results of 1 quarter often don't reflect the real situation of the crop year as a whole. So you always is advised that looking at the full year or a periods of 9, 6 months is usually much more accurate.

Net revenue in the year-to-date grew by 32%, reflecting the higher volumes invoiced and higher price for our key crops, especially soybean and corn. Adjusted EBITDA was BRL 490 million, with margin of 28%, which represents growth of 23% over the same 9 months period of 2018, reflecting the higher volumes and margin expansion in all crops.

Net income in the period was BRL 226 million, with margin of 13%, with the results impacted by calculation of fair value of biological assets. Here, I should note that cotton price fell over the third quarter, which leads to a revision of the calculation of the fair value of biological assets. However, in recent weeks, cotton price have recovered, supporting strong growth in the position for sale in 2020 as reflected by our hedge position, which means that the margins that effectively will be realized by the company when the cotton is invoiced will be higher than those implicit in the calculation of the fair value of biological assets.

Turning to Slide 12. You can see the -- our summarized statement of the cash flow. Given the generation of the cash from operations and the lower working capital needs as we participate [ in less markets ], the third quarter of this year is already cash flow positive at BRL 217 million. Given that the highest volume of cotton is invoiced in the fourth quarter, we project positive free cash flow for the remainder of the year.

Let's turn to Slide 13, please. Reflecting our positive free cash flow, net debt fell in relation to second quarter. And given our EBITDA in the last 12 months, our net debt-EBITDA ratio now stands at 1.8x.

I will now pass the call back over to Pavinato, with his comments on the look -- outlook for the next crop year.

[Aurelio Pavinato, executive]

Thank you, Ivo.

Let's turn to Slide 15, please. In this release, we present our initial planting intentions and projections for yield and production costs for the new season, which is currently in the planting phase. We have estimate a total planted area roughly 450,000 hectares. The potential is higher, but considering the delay in the onset of the rains in the State of Maranhão, we reduce the corn area by 8,000 hectares in the second crop.

For yields, which you can see on Slide 16, compared to the yields budget for the '18/'19 crop year, we estimate increases of 6.5% for cotton, considering the average of first and second crops; of 2.3% for soybean; and of 6.0% for second crop corn.

The weather outlook for the coming season calls for normal conditions. According to NOAA's November 4 report, the most probable scenario is of a weak El Niño, which generally favors crop development in Brazil.

On Slide 17, you can see a summary of our estimation for production cost per hectare, which is a 5.8% increase in relation to '18/'19 crop year, mainly due to the depreciation in the Brazilian real against the dollar over the course of the 2019.

Lastly, for our sales prices in the crop year, you can see our [ basic ] hedge position on Slide 18. Taking advantage of the recovery in cotton price in recent weeks, we advanced in our sales for 2020. And currently, 83% of our crops to be invoiced next year have been already sold.

Given this combination of factors, namely planted area, yields, costs and prices, our expectations for the '19/'20 crop year are positive, and we project continued good profitability for the new crop year that is starting.

Thank you, and now we are ready for -- open for questions.

[Operator]

[Operator Instructions] Thank you. This does conclude today's presentation. You may disconnect your line at this time, and have a nice day.